Sunday, August 28, 2011

Grain Risk Funds Boosted

Local governments in China have a surprising degree of autonomy in finances. But as some provinces get wealthy, the financial gap between localities is widening. In particular, agricultural provinces tend to have weaker finances. As the Henans and Heilongjiangs try to keep up with the Guangdongs and Shanghais, they rack up debts and are tempted to seize more farmland to build tax-generating projects.

In agricultural policy, the Chinese government is trying to even out the fiscal burden for maintaining a national priority: "food security." Various mechanisms are being tried out to shift more of the financial responsibility for grain subsidies and other policy measures onto the rich coastal provinces. One of the recent trends in China has been to transfer revenue from the central government to the financially weaker grain-producing provinces to help them fund subsidies (using tax revenue collected mainly from rich coastal provinces). Meanwhile, the richer coastal provinces are expected to foot most of the bill for subsidies to their farmers.

In 1994, a "grain risk fund" was set up in each province with funding shared by central and local governments. The money was to be used for procuring grain and edible oils to stabilize the market. When subsidies were introduced in 2004, the funds were used to fund direct subsidies to grain farmers. This year major grain-producing provinces are no longer required to contribute to their provincial funds. On August 25, Xinhua News Service reported that the central government has transferred 4.4 billion yuan (about $675 million) to the "grain risk funds" of major grain-producing provinces.

Nationally, the grain risk funds have been increased by 8 billion yuan. In addition to the 4.4 billion yuan of central government funds recently sent to major grain-producing provinces, local governments of other provinces have been ordered to contribute 3.6 billion yuan of their own money to increase their grain risk funds. Nationally, the fund now totals 38.2 billion yuan ($5.9 billion), of which 72% is in major grain-producing provinces.

The grain risk funds finance direct subsidies to grain farmers, grain and edible oil reserves, and policy interventions to stabilize grain markets. This does not represent a major increase in subsidies (although the funds will probably allow some of the poorer provinces to increase their subsidies or actually pay subsidies that previously existed only on paper). It represents a strategy of making rich provinces bear a larger share of the burden for maintaining "food security."

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